Pg 36 Flashcards
What does “issued” mean with regard to shares?
A share contract has been created where the directors create new shares and someone becomes the owner of them. There was execution and delivery of a share certificate.
What does “authorized and issued” mean with regard to shares?
Shares were approved and sold
What are authorized shares?
The total universe of shares for a class of stock
What does “issued“ mean regarding shares?
The number of authorized shares that have been sold by the corporation. Shares can only be issued once. After that they are re-sold many times but they never stop being issued shares.
What is an original issue of stock?
When a corporation sells its own stock to a shareholder
What does “outstanding” mean with regard to shares?
Shares of stock that are owned by shareholders. These are issued, but they are not treasury shares because they have not been re-purchased by the corporation
What is the primary market?
Market for securities being offered for sale for the first time. Here the corporation is the seller and the proceeds go to the corporation.
What is the secondary market?
This is the purchase and sale of securities that have already been issued by a corporation. Proceeds of the sales are paid to the sellers and not to the corporation that originally issued the securities
What are treasury shares?
Shares that were issued by the corporation, and then were later reacquired by the corporation. The corporation can then resell these and they are treated as still being issued, but they no longer have dividend or voting rights.
Can a corporation sell treasury shares for less than par value?
Yes, they can sell them at any price they want without causing watered stock liability.
Are treasury stock considered to be issued shares?
Yes, but they are not outstanding shares
What does the MBCA say with regard to treasury shares?
They have eliminated treasury shares
Who sets the pricing for shares?
Directors according to the business business judgement rule
If a share is issued that is in excess of the authorized amount or not an authorized type, what happens to it?
It is considered void
What is par value?
The arbitrary dollar value assigned to shares of stock that represents the minimum amount they can be issued for.
Does par value apply to resale of stock?
No, only to the issuance of stock. No share can issue for less than its par value
If a corporation wants to issue new shares to raise capital, but the market value is currently below par value, what do corporations usually do?
They set a super low par value such as one dollar per share that is much lower than the actual issue price
What is the trend today in relation to par value?
That it is outdated
Is it possible to authorize shares without par value?
Yes. You must specify in the articles of incorporation the number of no par shares that you will issue, otherwise the shares are void.
What is watered stock?
This refers to shares that are designated as fully paid when they are issued but they were actually issued for an amount below par value.
Where does the term “watered stock“ come from?
People used to have their cows drink lots of water to increase their weight just before they sold them at market, and this increased the price. The term means a misrepresentation about the value of something.
What is an example of watered stock?
If you have 500 shares of six dollar par stock (value of $3000) issued for services performed that valued $2000. The consideration was not fully paid.
What is the effect of watered stock?
Basically the corporation doesn’t have the value of the assets they need to operate and their financial statements are misleading
What are different ways you can pay for shares?
Cash, property, services, real property, intangible property
What are ways that you cannot pay for shares?
Promissory notes or promises of future services, although the MBCA does allow this.
How do modern statutes evaluate the value of consideration for shares?
Under the good-faith rule where they use the judgement of the board, shareholders, or incorporators to value property and services
What is the process of issuing shares?
- the articles of incorporation says the number of shares a corporation is authorized to have and the classes – when shares are authorized by shareholders, the board has the power to use them – when a corporation issues stock, they sell the stock and get money for it, and the shareholder gives a proportional share of rights for that class of stock
What are the requirements for a corporation to sell shares?
– they must be duly authorized
– validly issued
– fully paid
– non-assessable
What are the questions to ask when a corporation is selling shares?
- if the shares are duly authorized in the articles of incorporation
– if they were validly issued
– if they were fully paid
– if they were non-assessable
